Direct Investing via Real Estate Crowdfunding vs REITs?

Investing in real estate has become increasingly popular over the last few decades, and there are now multiple avenues that you can choose from to allocate your investment. Owning a rental property is one option; however, many individuals lack the capital and experience needed to get started. Alternatively, there are a few other ways to invest in real estate without having to purchase an entire property; these two ways are investing through REITs and a method which is now gaining popularity – real estate crowdfunding.

A real estate investment trust (REIT) is often called a “real estate stock”. REITs are entities that pool together money and invest in a portfolio of various real estate asset types. Anyone is able to purchase a share of a REIT as they arepublicly listed on the stock exchange. When investing in a REIT, you are investing in a blind pool of assets. Real estate crowdfunding allows an investor to specific properties through an online platform for as little as $1,000 for a stake in ownership or as part of a debt instrument. As multiple people invest small funds in that specific building, a large amount of money is able to be raised quickly. This opens doors for sponsors to access capital they could never reach at the same speed otherwise and buy quality assets which typically are larger commercial properties.

So, what are the differences between a REIT and the crowdfunding model?

Scope & Transparency: When investing in a crowdfunding offering, you are able to directly pick what real estate assets to include and exclude from your portfolio, allowing for further flexibility and diversity in your portfolio. Investors are able to do further research on the property beforehand to reaffirm their investment choice. In contrast, REITs are set up as blind pools and include numerous properties across the country. Unfortunately, this allows for less control over your investment portfolios as many REITs own hundreds of large commercial buildings and you, as an investor are investing into their blind pools.

Fees: Those who invest in crowdfunded real estate usually do not have to pay additional fees for access to properties or their membership to the online crowdfunding platform. This is because many crowdfunded real estate corporations will allocate the cost to the sponsor as a result of listing their real estate asset. Alternatively, REITs charge an annual overhead cost on the investor’s portfolio holdings as well as commission fees to pay their brokers. These front end fees can be as high as 10%.

Liquidity: REITs allow for an investor to trade and sell their shares on an open market; if you need to raise money quickly, you are able to do so very easily on a publicly traded REIT. Real estate crowdfunded investments are less liquid as they are not publicly traded, so it is more difficult to cash out an investment before the property is disposed. Such investments are supposed to be term investments – so, be prepared to hold on to crowdfunded real estate for the team of the proposed investment.

Although both REITs and Crowdfunding offer investment opportunities and exposure to the commercial real estate sector, the two also have a number of differences. If you have a clear approach to your investment strategy, crowdfunded real estate can provide expanded, property specific investment opportunities and add a dimension to your portfolio that REITs simply cannot.

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R2 is a Boutique Investments & Securities Firm licensed under The Securities Act in Ontario, Alberta, British Columbia, Manitoba, Nova Scotia, Quebec and Saskatchewan. * The returns indicated are not guaranteed but targeted best estimates based on our underwriting models.